How One Contract Clause Can Reduce or Eliminate Bad-Debt Write-Off

On behalf of Slinde Nelson on Monday, August 30, 2010.

What is the state of your Accounts Receivable? Chances are, some of your customers are having a tough time keeping up with all their obligations. We have written more demand letters for clients with delinquent customers in the past ten months than we have over the past ten years. This is an important message about how to make sure all of your ARs are easily collectible.

The Magic Words so Often Ignored

We are constantly amazed at the number of contracts we read that fail to include attorney fee provisions. Adding a well-drafted clause, appropriate in context, will put you in a far better position to collect all your outstanding receivables. In general, an attorney fee provision states that your debtor will reimburse you for all legal costs incurred to successfully collect on the debt. This type of provision is especially helpful in collecting small sums when collection costs -- including time and energy expended in the collection process -- would otherwise outweigh collecting on the outstanding sum owed.

High Costs of Litigation

For example, suppose a customer owing your company $18,000 is unresponsive to your repeated coaxing to pay up. Absent an attorney fee provision in the underlying contract, the costs inherent in pursuing a civil suit and obtaining a judgment or settlement could render collection of such a small amount economically unfeasible.

Let the Debtor Pay

The mere presence of attorney fee provisions in your contracts can also serve as a motivator to your customers to make timely payments on their obligations. In the above example of an $18,000 outstanding invoice, the absence of an attorney fee provision very likely decreases the debt's priority in the customer's mind. If the customer knows you are not entitled to collect attorney fees in pursuing the debt, they may be betting on the fact that you are unlikely to expend your business resources to collect on such a small amount owing to you.

This $18,000 example actually comes from a recent collection action we initiated on behalf of a client. We were able to secure payment swiftly because an attorney fee provision was indeed part on the client's underlying contract with its customer, and the its lawyer knew any defense for non-payment would be futile. If the customer-debtor's attorney attempted to defend the action, the debtor would not only have to pay the $18,000 owed to our client, but also his attorney's fees - - as well as our firm's fees. Had our client not had an attorney fees provision to rely upon, the $18,000 invoice might well have ended up as an entire write-off.

Review Your Contracts

We recommend that our clients have all of their contracts reviewed every three to four years, and, if necessary, updated to reflect changes in the law and the evolved business relationship of the parties. The present state of the economy makes this a good time to check your contracts to be sure they have not become stale, and that they contain strong attorney fee provisions.

Feel free to contact our office with any questions or comments regarding this important matter.